Section 3: The Law of Supply

The law of supply states that, ceteris paribus, product suppliers offer more of a product at higher than at lower prices. If the product price is high, the supplier can make greater profits by selling more (assuming the cost of production is constant and there is sufficient demand). A video game, for which the demand is high and therefore the price as well, will be supplied at greater quantities because the higher price makes firms willing and able to supply more.

Income and Substitution Effects

The other effect is the “substitution effect.” The supplier’s substitution effect states that as the market price of a product increases, other competing products, ceteris paribus, will become less attractive to produce. Suppliers will substitute the higher priced product for the less expensive product (and vice versa). If the market price for Grover, the Sesame Street stuffed animal, increases in price, and Big Bird does not increase in price, then suppliers will want to make more Grovers. They are more attractive and more profitable to make compared to the Big Bird stuffed animals.